On September 29, the European Central Bank published revisions to its guidelines for the implementation of monetary policy: certain collateral will now be assessed using a "second-best rating" provided by external agencies to determine whether it can be used for central bank financing, and valuation haircuts will be set accordingly; the haircut standards for different assets will also be updated. National central banks across the Eurosystem will begin applying the new rules from November 30.
Private sector collateral switches to "second-best rating"
When an asset has ratings from multiple external rating agencies, the Eurosystem previously typically used the highest rating among them. Under the new rules, the second-best rating will be used for unsecured bank debt, covered bonds, non-financial corporate debt, and certain non-euro area public sector assets to determine collateral eligibility and the applicable valuation haircut. For example, if an asset receives ratings of AA+, BBB+, and BB+ from three agencies respectively, the new rules would use the second-ranked BBB+. If only one agency provides a usable rating, that rating will in principle be downgraded by one notch before a determination is made. The ECB stated that this move aims to reduce assessment bias that could result from using only the highest rating. Euro area public sector assets will continue to follow the highest-rating rule. Rating changes may cause certain assets to be subject to higher haircuts, or even lose collateral eligibility; the specific outcome depends on the asset's existing ratings and its category.
Valuation haircuts to further differentiate asset risk
"Valuation haircuts" determine how much value of collateral can be used to support central bank loans. For example, an asset with a face value of 100 euros, if subject to a 10% haircut, would have a collateral value of 90 euros. Haircut adjustments therefore affect the amount of financing financial institutions can obtain using the same asset. This revision updates the haircut schedule for marketable assets and establishes specific rules for covered bonds held by banks themselves or issued by themselves or related entities, as well as for asset-backed securities held by the originating institution itself. For cases where a single loan claim is used as collateral, the new rules further distinguish whether the loan repays principal on schedule: all else being equal, loans that do not gradually amortize principal will be subject to higher haircuts.
Financial subsidiary bonds and temporary guaranteed loan rules adjusted in tandem
For eligible financial subsidiaries within non-financial corporate groups, bonds they issue will be classified under the same valuation haircut category as the group's non-financial corporates, namely Category 3. Such subsidiaries may also be included in the collateral framework as debtors of loan claims, subject to relevant climate risk adjustments. In addition, certain loan claims that were granted collateral eligibility under a temporary framework based on pandemic-era public sector guarantees but do not yet meet all requirements of the general collateral framework will retain eligibility only until the end of 2026. These modifications concern which assets the Eurosystem accepts when providing credit to financial institutions and how their collateral value is calculated, constituting an adjustment to monetary policy operating rules. The announcement did not declare any change to the ECB's policy interest rate.
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